The basic purpose of any investment is generating returns. Your money should earn better returns for your investment objectives. How do you measure whether your investments earn good returns? How do you compare your returns in particular period of time? How do you ensure that investments earn the returns that require fulfilling your future needs? You must analyze and compare the returns periodically to make decisions on your investments. It will help to you make decisions whether to continue with same investments or/and make necessary changes to achieve your financial goals. The following methods help you to measure the returns from your Investments in Mutual Funds. Simple Return Simple Return helps to measure the profitability of your investment. It helps you to find the total return of your investment. It is the difference between the NAV at the time of investment and the NAV at current level. It gives you the rate of return for the money invested at one time without any additional investments, say, if NAV at the time of initial investment is Rs.10/- and if the present NAV is Rs.13/- then the difference of Rs.3/- is the return. The percentage of this return is called Simple Return. See the following example: Annualized Return Annualized Return helps you to compare two investment options. If two investment options return simple interest of 6% and 4% over a period of 8 months and 5 months respectively. Then it is not easy to judge which investment option is best. Because Investment option ONE returned 6% in 8 months and option TWO returned 4% in 5 months. In order to find the best investment option, we can use the formula of Annualized Return as follows: Using the above formula, we can find which investment option is best as below: Therefore, the option TWO is the best among them, which returns 0.60% more than option ONE. Compounded Return Compounded Return is the cumulative effect of return on investment over a period of time. Suppose you invest Rs.10,000 for 3 years that earns 10% interest annually, the interest on this investment will be compounded. The interest of the above investment after the first year is Rs.1,000. This interest will be added to the principal amount of Rs.10,000 to become Rs.11,000 and the second year interest will be calculated on Rs.11,000. The interest at the end of the second year will be Rs.1,100 which will be added to the compounded amount of Rs.11,000 to become Rs.12,100. At the end of third year, the money will grow to Rs.13310. This is the compounding effect. In order to calculate this compound rate of return for the three years, we can use the following formula: By applying the above formula we can find the compound rate of return for the present value of Rs.13310/-. We can use the Excel sheet function to find the rate of return as below: In the above example, the answer will be 0.1, which is to be multiplied by 100, i.e. (0.1 x 100 = 10%). Therefore, the investment has grown at the interest rate of 10% compounded every year. Compounded Annual Growth Rate (CAGR) Compounded Annual Growth Rate (CAGR) helps to find the annual growth rate when an investment scheme gives fluctuated returns over a period of time. Since Mutual Funds give various returns from negative to positive over a period of time, CAGR is one of the best methods for finding rate of returns for Mutual Funds. CAGR measures the consistent rate at which an investment grows in a number of years ignoring the negatives and positives and provides the true picture of the performance of the Funds. By using, the above formula and the example below, we will find the CAGR: If you have invested Rs.50000/- and the value of your investment every year for 5 years as below: Then CAGR of the above investment for 5 years is 8.45% (0.08 X 100). The investment has grown 8.45% annually for 5 years. Investors can use any of the above methods according to their investment objective to measure the returns of the mutual funds. It is advisable to do these calculations every 6 months or 1-year basis. This will help the investors to monitor their investment and its performance.